Facebook Earnings: What to Watch

Can Facebook repeat its magical mobile-growth trick? That’s one thing investors will want to know when the company reports third-quarter earnings Wednesday.

Investors had soured on Facebook after its initial public offering last year, in part over doubts about whether users, and advertisers, would stick with the social network as they spent more time on mobile devices.

Facebook proved the naysayers wrong in the second quarter: It announced 53% year-over-year sales growth in July, thanks to a surge in mobile advertising. Mobile-ad revenue rose 76% to $656 million from the previous quarter. The stock went on a tear.

For the third quarter, analysts estimate Facebook will report adjusted earnings of 19 cents a share, up from 12 cents a year ago, according to S&P Capital IQ. Revenue is expected to increase 52% year-over-year to $1.9 billion.

Facebook will report results after the market close and will hold a conference call for analysts at 5 p.m. ET. Here are some key things to watch.

The Mobile Moment: Mobile advertising grew to 41% of Facebook’s revenue in the second quarter, from 30% in the first quarter. Some analysts, though, questioned whether mobile advertising represented a truly new stream of revenue, or was simply being diverted from desktop advertising.

“It’s not advertisers saying ‘I must have mobile,’” said Brian Wieser, an analyst at Pivotal Group. He wants more details on how Facebook breaks out and calculates mobile advertising. Facebook declined to comment.

A key component of Facebook’s mobile-ad business is “mobile app installs,” a specialized product for app developers who want to entice users to download apps to smartphones. That form of advertising is still a small part of Facebook’s overall revenue, according to the company, but it’s important because it represents a product tailored specifically for the mobile platform. Facebook expanded that business this quarter to include advertisements that spur users to keep using the apps they’ve already downloaded.

The Geography of Users: When it comes to advertising revenue, not all Facebook users are created equal.

Facebook collected $4.32 in revenue for each user in the U.S. and Canada in the second quarter, up from $3.20 a year earlier. In Europe, that number was $1.87. In Asia, it was 75 cents. That looks troubling, since most Facebook users are outside the U.S. and Canada.

The good news for investors is that revenue per user is growing everywhere. In Europe, the number is up from $1.43 a year earlier. In Asia, it was 55 cents. Facebook has made a push overseas to boost its advertising efforts, and investors are hoping it continues to pay off.

The Number of Users: Facebook’s biggest asset is its 1.2 billion monthly active users. Facebook wants to increase that number until practically everyone in the world is using the service. But to keep advertising growing, it also needs to increase what it calls “engagement,” or the amount of time users spend on the service.

One important measure is “daily active users,” or people who use Facebook either directly or through a third party site on a given day. In the U.S. and Canada, that number was 142 million last quarter, up from 130 million a year earlier.

World-wide, the number is growing faster: While Facebook added 12 million DAUs in the U.S. and Canada in the last year, 28 million were added in Europe, 52 million in Asia and 56 million in the rest of the world. There are 700 million DAUs total.

Diversify Lately? Facebook’s bottom line wasn’t always so focused on mobile advertising. It once generated a big chunk of revenue from payments and fees associated with social games on its platform.

With the decline of online game maker Zynga, though, the business has been shrinking. Some analysts would like to see it increase to help Facebook diversify its revenue streams. Payments and other fees made up 16% of Facebook’s revenue in the second quarter of 2012. A year later, that number was only 12%.

Debra Aho Williamson, an eMarketer analyst, compared Facebook with LinkedIn, which has three diverse revenue streams that are all growing rapidly. At Facebook, though, it’s all advertising. “Signs of life in other areas have been diminished,” she said.